Add
EXC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| EXC > SEC Filings for EXC > Form 10-Q on 24-Apr-2009 | All Recent SEC Filings |
24-Apr-2009
Quarterly Report
(Dollars in millions except per share data, unless otherwise noted)
EXELON CORPORATION
General
Exelon is a utility services holding company. It operates through subsidiaries in the following operating segments:
• Generation, whose business consists of its owned and contracted electric generating facilities, its wholesale energy marketing operations and competitive retail sales operations.
• ComEd, whose business consists of the purchase and regulated retail sale of electricity and the provision of transmission and distribution services in northern Illinois, including the City of Chicago.
• PECO, whose business consists of the purchase and regulated retail sale of electricity and the provision of transmission and distribution services in southeastern Pennsylvania, including the City of Philadelphia, as well as the purchase and regulated retail sale of natural gas and the provision of distribution services in the Pennsylvania counties surrounding the City of Philadelphia.
See Note 15 of the Combined Notes to Consolidated Financial Statements for segment information.
Exelon's corporate operations, some of which are performed through its business services subsidiary, Exelon Business Services Company, LLC (BSC), provide Exelon's business segments with a variety of support services at cost. The costs of these services are directly charged or allocated to the applicable business segments. Additionally, the results of Exelon's corporate operations include costs for corporate governance and interest costs and income from various investment and financing activities.
Executive Overview
Financial Results. Exelon's net income was $712 million for the three months ended March 31, 2009, as compared to $581 million for the three months ended March 31, 2008, and diluted earnings per average common share were $1.08 for the three months ended March 31, 2009, as compared to $0.88 for the three months ended March 31, 2008.
The increase in net income for the three months ended March 31, 2009 compared to the three months March 31, 2008 was primarily due to the following:
• Higher energy gross margins at Generation due largely to increased nuclear output as a result of fewer refueling outage days in 2009 and favorable portfolio and market conditions;
• net mark-to-market gains on economic hedging activities;
• increased distribution revenue at ComEd and PECO in 2009 resulting from 2008 distribution rate case orders;
• benefits associated with an Illinois Supreme Court decision granting Illinois Investment Tax Credits to Exelon and treating electricity as tangible personal property; and
• decreased operating and maintenance expense related to nuclear refueling outage costs associated with a lower number of planned refueling outage days during 2009 as compared to 2008;
• partially offset by the 2009 impairment of certain of Generation's Texas plants.
See Exelon Corporation - Results of Operations for further information regarding the changes in net income.
Oyster Creek License Renewal. On April 8, 2009, the Nuclear Regulatory Commission (NRC) issued to Generation a renewed operating license for Oyster Creek Generating Station (Oyster Creek) that expires in April 2029, enabling Oyster Creek to operate for an additional 20 years beyond its original license period. See Note 3 - Regulatory Issues for additional information.
Economic Environment. As the economic environment continues to be challenging, the Registrants have continued to perform assessments to determine the impact, if any, of recent market developments, including the bankruptcy, restructuring or merging of certain financial and energy companies, on the Registrants' financial statements. The Registrants' assessments have included a review of macroeconomic conditions, access to liquidity in the capital and credit markets, counterparty creditworthiness, value of the Registrants' investments (particularly in the employee benefit plans and nuclear decommissioning trust funds) and exposure to other risks. The recent unprecedented volatility in the economy may create additional risks in the upcoming months and possibly years.
• Macroeconomic conditions
By the end of the first quarter of 2009, the U.S. and world economy was in a severe recession. In response to the deepening world recession, the U.S. and other governments have taken drastic actions to shore up the world financial system by providing liquidity and other forms of support to financial institutions. There are signs that the financial situation may be improving, signaled by a potential stabilization in equity markets and a narrowing of spreads in the bond market. The U.S. and other governments have also increased spending in order to stimulate their economies. Although the economic situation for many consumers and businesses will likely continue to deteriorate over the next few months, there are some signs that the economic crisis is reaching its peak. While many forecasters are calling for a return to economic growth by the end of 2009, the current recession has proven considerably deeper than many had thought and it is uncertain when and how robustly the economy will start to recover.
As a result of the current economic conditions, demand for energy service has fallen substantially in the U.S. In addition, the slowing economy has had a dramatic impact on fuels prices. U.S. natural gas demand is estimated to have been more than 2% lower in the first quarter of 2009 than it was in the first quarter of 2008, while world oil demand is also down by about 2%. U.S. natural gas prices have fallen to less than $4 per one million British Thermal Units, reaching their lowest levels since 2002. U.S. coal use is down slightly year-over-year; this coupled with lower export demand for U.S. coal and strong builds in utility inventories have helped bring Eastern low-sulfur coal prices down to less than $50 a ton, after reaching more than $140 a ton last spring.
The economic conditions are proving challenging to Exelon. As a result of the decline in economic output, energy demand in ComEd's and PECO's service territories is lower, which has led to reduced sales to industrial, commercial and residential customers. In addition, customers may not be able to pay, or may delay payment of their utility bills. Management has taken steps to mitigate this risk through heightened collection efforts. Additionally, lower demand for electricity may lead to lower margins for Exelon's wholesale fleet. While Exelon's hedging policies have helped protect Exelon's earnings as markets have declined, as described above, prolonged depressed electricity prices would adversely impact Exelon's and Generation's results of operations in the future.
• Liquidity in the capital and credit markets
The Registrants believe they have sufficient liquidity despite the disruption of the capital and credit markets. The Registrants fund liquidity needs for capital investment, working capital, energy hedging and other financial commitments through cash flow from continuing operations, public debt offerings, commercial paper markets and large, diversified credit facilities ($7.3 billion in aggregate total commitments with $6.9 billion available as of March 31, 2009, of which no financial institution, assuming announced consolidations, has more than 10% of the aggregate commitments for Exelon, Generation and PECO and 12% for ComEd). Generation and ComEd also have additional letter of credit facilities used solely to enhance tax-exempt variable rate debt. Certain of
these letters of credit with a principal amount of $307 million and $191 million at Generation and ComEd, respectively, will expire in 2009, which the Registrants plan to extend or replace. See "Variable-Rate Debt" within Liquidity and Capital Resources for further detail on these credit facilities.
While not significant to the Registrants to date, the disruptions in capital and credit markets may result in increased borrowing costs associated with short-term and long-term debt. With the exception of debt to unconsolidated financing affiliates, the Registrants have $12 million of debt at Generation maturing for the remainder of 2009 and $613 million of debt maturing in 2010 ($400 million and $213 million at Exelon Corporate and ComEd, respectively). The debt to unconsolidated financing affiliates at PECO is repaid through the collection of competitive transition charges from customers as allowed by restructuring legislation that was adopted in Pennsylvania in 1996.
The Registrants routinely review the sufficiency of their liquidity position, including appropriate sizing of credit facility commitments, by performing various stress test scenarios, such as commodity price movements, increases in margin-related transactions, changes in hedging levels, and the impacts of hypothetical credit downgrades. Management continues to closely monitor events and the financial institutions associated with its credit facilities, including monitoring credit ratings and outlooks, credit default swap levels, capital raising and merger activity. See PART I. ITEM 1A. Risk Factors of Exelon's 2008 Form 10-K for information regarding the effects of a longer-term disruption in the capital and credit markets or significant bank failures.
• Counterparty creditworthiness
The Registrants are subject to credit risk, which relates to the ability of counterparties to meet their contractual payment obligations or the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price. Generation's power-marketing activities are governed by risk management policies limiting transactions to a diversified group of high quality counterparties. During 2008, the bankruptcy of Lehman Brothers Holdings Inc. and the weakening of companies within the energy industry have underscored the importance of these risk management practices. Although Generation's credit exposure was predominately with investment grade companies at March 31, 2009, changes in forward market prices could have a disproportionate impact to the percentage of credit exposure with non-investment grade companies. As of March 31, 2009, the net exposure after credit collateral for Generation's commodity contracts of $1,218 million included $1,215 million of exposure to investment-grade companies and $3 million of exposure to non-investment grade companies, primarily in the coal supply industry. As further discussed below, Generation also currently procures uranium concentrates through long-term contracts. Approximately 59% of the requirements from 2009 through 2013 are supplied by three producers. In the event of non-performance by these or other suppliers, Generation believes that replacement uranium concentrates could be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements. Management continues to closely monitor the status of Generation's counterparties and will take action, as appropriate, to further manage its counterparty credit risk.
Under the Illinois Settlement Legislation, ComEd procures power through supplier forward contracts, standard block energy purchases, and spot market purchases. Collateral postings are required only of suppliers, including Generation, for the supplier forward contracts. The standard block energy purchases require collateral postings from both ComEd and the counterparty suppliers, including Generation, should exposures between forward market prices and benchmark price levels exceed established unsecured credit limits outlined in the agreements. In the event the counterparties fail to perform, ComEd might be forced to purchase power through a request for proposal (RFP) process or in the spot markets at less favorable prices. As of March 31, 2009, there was no cash collateral or letters of credit posted between suppliers and ComEd. The potential failure of energy suppliers to perform is mitigated by ComEd's ability to recover its actual costs to procure power as stipulated in the Illinois Settlement Legislation as well as the ICC-approved procurement tariff.
PECO has counterparty credit risk related to its electricity and natural gas suppliers. Generation provides 100% of PECO's electric energy under a purchase power agreement (PPA). There are no collateral posting
provisions included in PECO's electric supply agreement with Generation. PECO procures natural gas from suppliers under both short-term and long-term contracts. The potential failure of natural gas suppliers to perform is mitigated by PECO's ability to seek recovery of its actual costs to procure natural gas through the Pennsylvania Public Utility Commission's (PAPUC) purchased gas cost clause, subject to PAPUC review. A further discussion of counterparty risk is included in ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
• Value of investments (particularly in employee benefit plan trusts and nuclear decommissioning trust funds)
Pension and Postretirement Benefit Plans. Exelon sponsors defined benefit pension and postretirement benefit plans for the employees of the Registrants. The Registrants believe that the oversight of the investments held under Exelon's employee benefit plans is rigorous and that the investment strategies are prudent. During 2008, Exelon's unfunded status increased significantly, to $6.38 billion at December 31, 2008, primarily due to lower than expected asset returns. For financial reporting purposes, the unfunded status of the plans is updated annually, at December 31. Challenging financial market conditions continued during the first quarter of 2009, which impacted the unfunded status of the defined benefit pension and other postretirement benefit plans. If the unfunded status of the plans increases at December 31, 2009 from the levels at December 31, 2008, expected contributions to the plans could increase or be accelerated to earlier periods than previously estimated. The U.S. Treasury Department issued guidance on March 31, 2009 that provides some relief from 2009 funding requirements. Exelon is evaluating the impact of that guidance, as well as monitoring other legislative pension funding relief proposals currently being discussed. See Liquidity and Capital Resources for additional information.
Nuclear Decommissioning Trust Fund Investments. Nuclear decommissioning trust funds have been established on a unit-by-unit basis to satisfy Generation's nuclear decommissioning obligations. Currently, Generation is making contributions only to the trust funds of the former PECO units based on amounts being collected by PECO from its customers and remitted to Generation. While Generation has recourse to collect additional amounts from PECO customers (subject to certain limitations and thresholds) with respect to the former PECO units, it has no recourse to collect additional amounts from ComEd customers for the former ComEd units or from the previous owners of the Clinton, Oyster Creek and Three Mile Island nuclear plants (the former AmerGen Energy Company, LLC (AmerGen) units) if there is a shortfall of funds necessary for decommissioning. Generation believes that its oversight of these trust funds is rigorous and the investment strategy is prudent. At March 31, 2009, approximately 46% of the funds were invested in equity and 54% were invested in fixed income securities, with limitations related to concentration and investment grade ratings. See Note 11 of the Combined Notes to Consolidated Financial Statements for the amounts of unrealized losses on the trust funds during the three months ended March 31, 2009. Nuclear Regulatory Commission (NRC) regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in certain minimum amounts at the end of the life of the facility to decommission the facility. Generation is required to provide to the NRC a biennial report by unit (annually for units that have been retired or are within five years of the current approved license life), based on values as of December 31, addressing Generation's ability to meet the NRC-estimated funding levels. Depending on the value of the trust funds, Generation may be required to take steps, such as providing financial guarantees through letters of credit or parent company guarantees or making additional contributions to the trusts, which could be significant, to ensure that the trusts are adequately funded and that the NRC minimum funding requirements are met. As a result, Exelon's and Generation's cash flows and financial positions may be significantly adversely affected. Generation's most recent report was filed with the NRC on March 31, 2009, based on trust fund values and estimated decommissioning obligations as of December 31, 2008. The estimated decommissioning obligations for the NRC report were calculated in accordance with NRC regulations and may differ from the ARO recorded on Generation's and Exelon's balance sheet at December 31, 2008, primarily due to differences in assumptions regarding the decommissioning alternatives to be used (DECON, Delayed DECON, or SAFSTOR) and potential license renewals. Based on the values used in the NRC filing at December 31, 2008, six units at three nuclear generating stations were in an underfunded position by approximately $185 million in total, relative to the NRC
minimum funding requirements. In its NRC filing, Generation stated that it is evaluating the remedy to be utilized to address the underfunded status and such remedy will be in accordance with NRC regulations and guidance. As the future values of trust funds change due to market conditions, the NRC minimum funding status of these three stations and Generation's other nuclear generating stations will change at subsequent NRC filing dates. In addition, if changes occur to the regulatory agreement with the PAPUC that currently allows amounts to be collected from PECO customers for decommissioning the former PECO nuclear plants, the NRC minimum funding status of those plants could change at subsequent NRC filing dates. See PART I. ITEM 1A. Risk Factors of Exelon's 2008 Form 10-K for information regarding the effects of a longer-term disruption in the capital and credit markets or significant bank failures.
Based on a regulatory agreement with the ICC that applies to the former ComEd nuclear generating units on a unit-by-unit basis, as long as funds held in the nuclear decommissioning trust funds exceed the total estimated decommissioning obligation, decommissioning-related activities recognized in the Consolidated Statement of Operations, including realized and unrealized income and losses of the trust funds and accretion of the decommissioning obligation, are generally offset within Exelon's and Generation's Consolidated Statements of Operations. Should the trust funds for the former ComEd units continue to experience declines in market value such that the value of the trust funds for any unit falls below the amount of the estimated decommissioning obligation for that unit, the accounting to offset decommissioning-related activities in the Consolidated Statement of Operations for that unit would be discontinued, the decommissioning-related activities would be recognized in the Consolidated Statements of Operations and the adverse impact to Exelon's and Generation's results of operations and financial positions could be material. At March 31, 2009, the trust fund investment values for each of the former ComEd units exceeded the related decommissioning obligation for each of the units. For the purposes of making this determination, the decommissioning obligation referred to is the obligation reflected on Generation's Consolidated Balance Sheet at March 31, 2009 calculated in accordance with FASB Statement No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143), and is different from the calculation used in the NRC minimum funding obligation filings based on NRC guidelines. See Note 11 of the Combined Notes to Consolidated Financial Statements for additional information regarding the accounting for the former ComEd nuclear generating units as a result of the ICC order.
Securities Lending Program. The Registrants engage in a securities lending program with respect to the investments within their employee benefit plan trusts and nuclear decommissioning trust funds. In connection with this program, the securities loaned are supported by collateral posted by the borrowers, which the Registrants invest in a short-term collateral fund or in assets with maturities matching, or approximating, the duration of the loan of the related securities. The Registrants bear the risk of loss with respect to their invested cash collateral. Such losses may result from a decline in fair value of specific investments or liquidity impairments resulting from current market conditions. Losses recognized by the Registrants have not been significant to date. Under its lending agreements, Exelon had a fair value of invested collateral of $528 million and $660 million as of March 31, 2009 and December 31, 2008, respectively. Management continues to monitor the performance of the invested collateral and to work closely with the trustees to limit any potential further losses. Exelon, the trustees and the borrowers have the right to terminate the lending agreement at their discretion, upon which borrowers would return securities to Exelon in exchange for their cash collateral. If the short-term collateral funds do not have adequate liquidity, the Registrants may incur losses upon the withdrawal of amounts from the funds to repay the borrowers' collateral. In the fourth quarter of 2008, the Registrants decided to end their participation in the securities lending program and have chosen to initiate a gradual withdrawal of their participation in the securities lending program in order to avoid potential losses on invested cash collateral due to the lack of liquidity in the market. Currently, the weighted average maturity of the securities within the collateral pools is approximately 8 months. At December 31, 2008, Exelon had $649 million of loaned securities outstanding. At March 31, 2009, Exelon had $530 million of loaned securities outstanding under its lending agreements, representing a decrease in loaned securities outstanding since December 31, 2008 of $119 million primarily due to the return of loaned securities. Of the balance of loaned securities outstanding at March 31, 2009 (in terms of value), approximately 65% is expected to be returned by the end of 2009, with the remainder expected to be returned primarily in 2010.
The Registrants regularly evaluate the carrying value of their long-lived assets, including goodwill and generating plants, for impairment. During the three months ended March 31, 2009, Generation recorded an impairment charge of $223 million related to its Texas plants. See Notes 4 and 6 of the Combined Notes to Consolidated Financial Statements for further information on Generation's plant impairment. Further declines in the economic environment may impact market-related assumptions, resulting in a decrease of the estimated fair value of long-lived assets.
In addition, the Registrants have reviewed their exposure to insurance risk and have concluded that there have been no material changes related to the availability and cost of liability, property, nuclear risk, and other forms of insurance. Management continues to monitor closely events and the ratings for insurance companies associated with its insurance programs. Further declines in the market may have a significant adverse impact on the availability and cost of insurance.
Outlook for 2009 and Beyond.
Several significant events may occur during the rest of 2009 and beyond, including the following:
Proposal for Acquisition of NRG
• On October 19, 2008, with authorization from Exelon's Board of Directors, Exelon submitted a proposal to NRG to enter into a business combination with NRG under which Exelon would exchange 0.485 of a share of Exelon common stock for each share of NRG common stock. On November 12, 2008, Exelon announced an exchange offer in which Exelon, through its wholly owned subsidiary Exelon Xchange, offered to acquire all of the outstanding NRG common stock in exchange for 0.485 of a share of Exelon common stock plus cash in lieu of fractional shares, representing a total equity value of approximately $6.2 billion for NRG based on Exelon's closing price on October 17, 2008. NRG shareholders had tendered approximately 106 million shares of common stock of NRG, representing just over 45.6% of all outstanding shares of NRG common stock, as of the initial expiration of the offer on January 6, 2009; and had tendered approximately 125 million shares of common stock of NRG, representing over 51% of the outstanding shares of NRG common stock as of the first extended expiration date on February 25, 2009. Exelon has extended the offer until June 26, 2009 at 5:00 p.m. New York City time, unless further extended. The extended expiration date enables Exelon to focus on seeking regulatory approvals for the transaction and the solicitation of proxies for the election of NRG directors at the NRG annual meeting of shareholders.
Exelon must receive approval from and/or make filings with various Federal and state regulatory agencies with respect to the offer and the second-step merger. At the Federal level, these approvals include the approval of FERC under the Federal Power Act and the NRC under the Atomic Energy Act. In addition, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), the exchange of shares pursuant to the offer cannot be completed until Exelon has made required notifications and given certain information and materials to the Federal Trade Commission (FTC) and/or the Antitrust Division of the United States Department of Justice (DOJ) and until specified waiting period requirements have expired. At the state level, final orders of each of the PAPUC, the New York Public Service Commission, the California Public Utility Commission (CPUC), and the Public Utility Commission of Texas (PUCT) approving the consummation of the offer and, in some jurisdictions, the second step-merger are required. Other state approvals may be required and State Attorneys General may also investigate the transaction.
On December 17, 2008, Exelon filed notification with the FTC and DOJ of its intention to acquire NRG in compliance with the pre-merger notification requirements of the HSR Act, and on December 18, 2008, filed an application with FERC for approval of the proposed business combination. Various parties have intervened in the FERC proceedings, including the Illinois Attorney General. By letter dated January 29, 2009, Exelon filed an application with the NRC for approval of the indirect transfer of NRC licenses for
the NRG nuclear stations and, if required, Generation's nuclear stations. On February 4, 2009, NRG's legal counsel submitted a letter to the NRC arguing that Exelon's application for NRC approval is insufficient, premature, and speculative and raises significant policy issues. In a letter to the NRC on February 10, 2009, Exelon's legal counsel addressed the arguments raised by NRG's counsel. Additionally, on December 22, 2008, Exelon filed petitions seeking approval of the acquisition with the New York Public Service Commission and the CPUC, although the CPUC declined to accept the filing for technical reasons. Exelon submitted a revised application to the CPUC on February 17, 2009, and the CPUC issued a letter on April 2, 2009, indicating the CPUC would . . .
|
|